Dee, actually if you look at the definition of litter it says:
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3: the offspring at one birth of a multiparous animal <a litter of puppies>
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Plus she had two puppies and one died. That fact is irrelevant. If she had an agreement for pick of the litter then she should keep her word if the sire owner wants the puppy. Personally I would never do that to anyone. I had a verbal agreement with someone for pick of the litter and her female had only one female puppy but I did not have the heart to take her so I just told her I would take a stud fee of $300 instead. I could have taken the puppy and sold her and made a lot more money but to me that was not the right thing to do.